Global vote of confidence in economy

IRELAND'S retention of its top-notch international credit rating is a vote of confidence in the "fundamental soundness" of the economy, Bank of Ireland's top economist said yesterday.

Dan McLaughlin said tax policies over the past decade, together with the progressive reduction in government borrowing, were the key drivers in gaining the confidence of international investors.

International credit rating agency Standard & Poor's (S&P) reaffirmed Ireland's AAA long-term rating, which is the highest available, last month.

The AAA rating is assigned to the borrowings of most governments in the eurozone and reflects the low-risk profile and high probability of repayment attached to these borrowings.

Institutional investors direct funds into debt instruments issued by the Irish Government on the basis of the rating, which also determines the cost of borrowing. The improvement in Ireland's credit profile means the Irish Government can borrow at a rate broadly the same as governments of traditionally stronger economies, such as Germany. Rates applied to Irish government borrowing before the AAA rating was granted were typically more than 2% higher than other governments.

S&P said last month in its report that the rating reflected the diversified and flexible nature of the Irish economy, strong government finances, a favourable age profile in the general population and the effect this would have on future pension liabilities.

S&P said it was particularly important that government borrowing had fallen from more than 90% of annual national income, as measured by Gross Domestic Product (GDP), 10 years ago to around 30% at the end of last year.

Irish Government debt stood at almost 50% of GDP when the Irish pound was replaced with the euro on the world currency markets in January, 1999.

The fall in the national debt burden was the biggest in any eurozone country in the intervening period.

This gave Ireland the second-lowest debt burden in the euro area, after Luxembourg. Britain has set a borrowing ceiling of 40% of national income.

Dr McLaughlin said government policies had been "extremely frugal for some time" and that Ireland's debt profile meant the Government had considerable scope to borrow to fund major capital investment.

The National Treasury Management Agency (NTMA), which manages the national debt on behalf of the Government, said in its year-end report last week that the positive assessment of Irish debt by international agencies, such as S&P, coupled with the effective organisation of the Irish government bond market, helped to make Government bonds more attractive to international investors.